Poland’s biggest retail landlord, JSE-listed EPP has reported its results for the six months ended on the 30th of June 2020.
Landlords in Poland could not legally enforce rental payments by tenant’s during the country’s seven-week Covid-19 lockdown between the 14th of March and the 3rd of May 2020. This had a material impact on the company’s net operating income which for the year, declined to €52.7 million with distributable earnings per share decreasing to €2.38 cents per share. EPP’s total investment in properties and joint ventures were reduced to €2.4 billion due to valuations declining by 3.9%.
While the company’s earnings were impacted by the pandemic regulations, its balance sheet remained stable with a secure liquidity position including cash on hand of €177 million. To prioritize sustainability, EPP continues to take precautionary measures to preserve capital and to maintain liquidity including retaining the dividend for the second half of the 2019 financial year and drawing additional corporate facilities in the first half of the financial year. As part of this process, the company has elected not to distribute a dividend for the first half of the year while it waits for the pandemic recovery to gain greater traction and more certainty to return to the market. EPP will assess the payment of the second half dividend while finalising its full year results which are expected in March 2021.
The net loan-to-value (LTV) ratio increased marginally from 50% to 51.7% over the period. It remains well within covenant levels of 68%. The company will amplify its key deleveraging strategy over the next twelve to eighteen months. To reinforce its balance sheet position, EPP will review its asset base to identify those assets that could ideally be released into joint venture partnerships or, alternately sold outright where it remains the active asset manager. The company will adopt a measured approach to asset recycling to support LTV reduction and potential asset disposals would only conclude with suitable partners at the right pricing for EPP.
“EPP has revised its 2020 full-year earnings per share guidance upwards from EUR 4.00 – EUR 5.00 cents per share to EUR 4.75 – EUR 5.25 cents per share, assuming no further significant changes occur in our market. We are ready for the challenges ahead and focused on resuming dividend payments to shareholders as soon as possible while being cognisant of our balance sheet strength” commented Tomasz Trzósło, CEO of EPP.
“While it was necessary to sacrifice income in the short term to support our retailers, we were able to extend most leases materially in return and have gained greater operational strength and long-term sustainability as a result. Operationally EPP has fundamentally increased its resilience. Our team has managed well to assist tenants, stabilise the portfolio, extend leases, access liquidity, and reinforce our balance sheet. At the moment, we are focused on concluding the few remaining negotiations in the portfolio.”
In the first two months of the period pre-lockdown, EPP’s portfolio showed strong performance with sales up by 4.2%, footfall up by 2.1% and a 98% collection rate. During the lockdown, only 21% of gross lettable area (GLA) was operational. EPP prioritised liquidity and cost optimisation with temporary payroll cuts among other measures as well as supporting communities within the catchment areas of the EPP portfolio and ensuring the safety of its employees. It actively engaged with tenants and the real estate industry and leveraged available government support programmes.
Poland is expected to be one of the least impacted economies by Covid-19 in the next eighteen months with a +1.1% GDP growth forecast for 2020-2021. The country’s rapid economic response to the pandemic’s lockdown included nearly €50 billion of support to protect jobs and business liquidity and to promote economic activity. This was followed by another stimulus package primarily aimed at providing liquidity for companies. The total stimulus amounted to almost €70 billion – equal to about 15% of the Polish GDP. Poland should also be a significant beneficiary of the €750 billion EU recovery fund and the €1.1 trillion seven-year EU budget. Mobility statistics show that a significant part of the Polish economy is resuming usual activity and shopping centres’ footfalls and turnover could return to pre-pandemic levels in 2021. The country is now well-prepared to cope with Covid-19 and it has one of the lowest numbers of new cases in Europe.
Poland’s shopping centres reopened earlier than most other European countries on the 4th of May 2020, followed by food courts two weeks later and entertainment and fitness tenants from early June 2020. Nearly 100% of EPP’s retail space was operational from July 2020, up from 93% at the end of June and the portfolio has recorded strong footfall and sales recovery since reopening. By July 2020, turnover levels had returned to 93% of 2019’s numbers with the portfolio footfalls having recovered to 85% of those in 2019 for September so far.
EPP ended the half-year with a stable occupancy of 96% and a longer weighted average lease termination (WALT) of 4.7 years which will increase further in the coming months as all the negotiations with tenants are concluded. These agreements are being finalised against a backdrop of positive retail fundamentals. Poland has no high-street retail and low shopping centre densities of 265m2 per 1 000 residents, compared to 282m2 in Western Europe which has a substantial amount of high-street retail in addition to shopping centre stock. No new shopping centre product is likely to be introduced to the Polish market in the short term. The e-commerce share of total retail sales in Poland increased from 5.6% in February 2020 to a lockdown peak of 11.9% in April but this has already been reduced to near pre-Covid-18 levels of 6.1% in August. This indicates that Polish consumers shop online when they need to, but they prefer physical in-store contact with products.
Leasing highlights post-lockdown demonstrated high levels of confidence in EPP’s assets. In August, the international retailer Primark opened its first store in Poland, which spans 5,400 m2 of GLA in the EPP co-owned Galeria Młociny in Warsaw. Debuting in the physical retail space, successful online retailer Modivo has invested in its first brick-and-mortar store, also in Galeria Młociny, with a revolutionary new shopping concept.
“EPP is well-positioned and operating in a resilient economy that is supported by favourable property fundamentals. We will continue to move forward with our asset recycling strategy, keeping a firm focus on liquidity and balance sheet strength. Maximising footfall and tenant turnover are operational priorities for EPP, and we remain dedicated to adding value through strong asset management” Tomasz Trzósło concluded.